SPX: Limited Follow-Through Buying
Al Brooks | Feb 01, 2016 10:42AM ET
price action in the Emini on Friday was bullish. It was a small pullback bull trend day on the 5-minute chart, and a bull breakout above a bear flag on the daily chart. A small pullback bull trend is unsustainable and therefore it is a type of buy climax. There is a 50% chance of follow-through buying in the 1st 2 hours, and a 75% chance of at least 2 hours and 2 legs of sideways to down trading that begins within the 1st 2 hours.
On the daily chart, a strong bull breakout above a bear flag is a low probability event. This results in bears trapped into shorts and bulls trapped out of longs. Both will buy the 1st pullback, so there is a 75% chance of at least a small second leg up after the 1st pullback.
The reversal on the weekly chart follows 2 extremely big bear bars closing on their lows and then a weak buy signal bar (a big doji). There is a 75% chance that there will be sellers above the buy signal bar. This means that the odds are that the rally will fail within 2 – 5 bars (weeks) and it will be followed by a test down. This is a bear rally on the weekly and daily chars. If it continues relentlessly, or if it tests back down and forms a major trend reversal, then the bulls will again gain control. Until then, bulls will be taking fast money profits, expecting it to fail, and bears will sell every strong 2 – 5 day rally, confident of at least a fast money profit.
The rally is close to a 50% pullback of the January selloff, and it is near the other resistance levels that I mentioned over the weekend. The highest resistance levels are the 2,000 round number and the December 29 lower high. The rally more likely will fail around where it is now and the December 14 bottom of the 3 month trading range. If it does, it would create a nested head and shoulders top. On the daily chart, the left shoulder is the September high.
With 30 minutes to go before the NYSE open, the Globex is down about 14 points. This would be a breakout test of the January 27 top of the bear flag at 1910.00. At least a small 2nd leg up is likely, so this support is a logical place for that leg to begin.
Less likely, Friday’s bull breakout will fail, and the bear trend will resume. Since the January selloff was so strong, the odds are that its low will be tested within a month or so, and it is possible that the trend resumption down can come without a 2nd leg up first. Although that is unlikely, those who trade the markets for a living will not be in denial if it does. They will sell.
Likewise, even though there us a 75% chance of 2 hours of sideways to down trading beginning in the 1st 2 hours, there is a 25% chance that the rally will just go up all day. Traders learning how to trade the markets need to trade what is happening, not what was likely to happen.
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